What Is Inventory Carrying Cost?

Inventory carrying costs are the sums your company spends on keeping products on hand over time, including costs such as storage, inventory management, insurance, etc. We will discuss the various factors that contribute to inventory holding costs, as well as how to calculate carrying costs, so that you can incorporate these costs into your accounting practices. Capital costs are the largest contributor to inventory holding costs, as they comprise the cost to buy the products that you are holding.

Inventory holding costs are the costs that the company will incur for holding and storing their inventory for a period of time. The cost that a business will incur to hold and store inventory over a certain time a company has it is called carrying costs. The definition of carrying costs for inventory is simply the expense that the business incurred to store the items in the inventory over a certain period of time, until it was used to fulfill orders.

Inventory carrying cost is a financial term, which is the amount that a business spends on holding inventory for a set amount of time, including any investments made to own, store, and maintain inventory, which is not sold. Typical storage costs, another term for inventory carrying costs, differ from industry and company size, often comprising 20% to 30% of the total inventory cost, and typical storage costs rise the longer an item is stored before being sold. Inventory holding costs include hard costs, such as the cost you invest in the item(s) being held, the physical storage facility or warehouse, and the costs for shipping and distribution, and soft costs, such as taxes, insurance, and staffing required to handle the item(s).

Inventory carrying costs will include related costs for storage, salaries, transportation and handling, taxes, and insurance, and depreciation, shrinkage, and opportunity costs. To determine inventory carrying costs, first total up the costs listed above–capital, warehousing, salaries, transportation, insurance, taxes, administration, depreciation, obsolescence, shrinkage–over one year. Total carrying costs are used by businesses to determine how much revenue they can generate, given their current stock levels.

Inventory carrying costs are used to help businesses determine how much profit can be made based on current inventory levels. Carry-over costs include the costs to lease a warehouse to store the stock, to operate the warehouse, to pay salaries of employees who work at the warehouse, any losses from theft and damage, and the insurance costs to cover the inventory. Inventory Risk Costs –risk costs vary by business, but typically include obsolescence, damage, shrinkage, and moving of inventory. By knowing how many units you have in stock, and what the costs are to your warehouse in terms of expenses such as warehouse rent, employee salaries, depreciation, insurance, and other operating processes involved with inventory storage (or storage fees if using third-party eCommerce warehouses), you will have a precise view of your storage costs.

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